Myths About Employee Misclassification

independent contractor

Last week, the US Department of Labor posted a list of one dozen commonly encountered “misclassification myths” on their website and then promptly took them down, leaving only a cryptic message suggesting the list would be reissued soon.  It seems that even for the agency responsible for guiding labor policy, the issues surrounding misclassification can be a source of confusion and misunderstanding.  The DOL list has been subsequently reposted to their site. Nevertheless, nextSource experts took the time to boil down some of the top myths currently encountered in the world of workforce management.

The US department of Labor expends great effort to educate workers on employee classification.  Yet, many organizations continue to run afoul of the rules.  Some due to outdated understanding of the frequently updated rules, others simply because they are unaware of the rules altogether.  Worst of all are those that hold dangerous misconceptions.  The following information is intended to arm workforce managers with facts to dispel these myths.

Myth 1 – Once a worker qualifies as an independent contractor, they are considered an independent contractor regardless of jurisdiction

Sadly, this is simply false.  In reality, state and federal tests can vary widely. Some states begin with the assumption that a worker is an employee unless specific criteria are met.  Others generally examine the direction and control exercised by the employer over the service to arrive at a classification decision.  Some states use the same test as the IRS, whereas some states use the time-honored “ABC test”.  An employer must be aware of the laws governing the jurisdiction where they are situated.  The approach taken by a state may have also been changed or replaced since the time when the organization first engaged the worker.  Today’s rules may look quite different from last year’s.  This is why it is critical to re-evaluate all workers periodically (especially if the original dates of engagement are extended) to verify what, if anything, has changed in the working relationship.

Myth 2 – Providing a worker with a 1099 automatically means they are an independent contractor

This is a dangerously false statement.  While providing workers with a 1099 indicates your organization may have classified the worker as an independent contractor, it has no bearing on whether or not the work performed by this resource qualifies him/her to be an IC.  Every organization is responsible for ensuring IC classification is accurate.  For example, when a worker is audited by the IRS (or provides their information to the Department of Labor,) they are frequently compelled to provide their tax information. If they provide a 1099 from your organization but have no proof of income from any other clients, that could trigger a review of your organization’s overall worker classification processes.

Myth 3 – My employer wants me to be an independent contractor, and that means I am not an employee

Organizations sometimes intentionally misclassify workers in order to enjoy the lower tax and benefits costs associated with engaging ICs versus other types of workers.  But this is not only the case.  Most often, organizations misclassify workers due to the complex nature of laws cited in Myth #1. For example, if an independent contractor is based in one state but doing work in another, it becomes difficult to know which test is appropriate to administer. What if the worker qualifies in one location but not another?  The responsibility is shared between the worker and the hiring organization to achieve the correct classification.  Neither is absolved of responsibility when an audit occurs.

How can nextSource help organizations address these kinds of thorny inconsistencies?  nextSource has deployed a technology application powered by the world’s largest global employment law firm. This solution ensures nextSource clients are up to date on changes in legislation and further, supports tests across multiple locations where work is to be performed or where workers are based.  Furthermore, nextSource performs regular worker audits triggered by engagement extensions or changes in the original scope/dates of their work to verify no behavior changes will impact the proper classification.

This allows nextSource to offer solid recommendations regarding classification of their clients’ workforce that will hold up in the event of audit or investigation.  Should your organization believe you have potential misclassification issues, you can use our quick online classification assessment tool and determine if nextSource can be a resource to you when addressing this challenge.

More Articles